“Total package” is a strategy that needs to fit in and be part of the complete remuneration model, and underpins both the HR and organisation strategy. In this article from Human Capital Review, Mark Bussin clarifies what “total package” means and how it works in practice.
What does “total package” mean?
Total package (guaranteed cost of employment) is often confused with total cost to organisation.
The following illustrates the concepts:
+ Allowances (travelling / entertainment / subsistence / PC / telephone)
+ Guaranteed annual bonuses (13th cheque)
+ Benefits (organisation car / housing)
= Basic package
+ Employer contributions (medical / retirement / group life)
= Total package
+ Inconvenience pay (overtime / standby / shift)
+ Short-term incentives (performance bonuses)
+ Employer contributions (statutory)
= Total remuneration (total cost of employment)
+ Long-term incentives (shares)
= Total earnings (total cost to organisation)
(Inconvenience pay, incentives (short- and long-term) and statutory contributions (imposed on the employer by law) fall outside the definition of “total package” and will always be paid in addition thereto).
Total packages: Why the trend?
Many African organisations have moved to total packages in line with remuneration trends. Listed reasons and advantages are:
- greater flexibility within a total package structure
- easier to structure packages in accordance with individual needs
- fixed and known guaranteed employment costs – no hidden extras
- better positioned to attract and retain high quality staff
- more equitable and defensible approach to remuneration
- simplified and accurate market comparisons and benchmarking
- true worth known to and understood by employees
- simplified cost control and costing
- improved potential to create direct links between performance and pay
- achievement of internal equity, and
- safety in the event of a tax audit
How the total package works
The items that are being included in total package are all payments and benefits of a fixed and regular nature and are capable of exact valuation. People are usually entitled to such payments and benefits.
African employers have a moral obligation to ensure that employees are covered for health risks and emergencies and are saving for retirement. These obligations are easily met by making membership of the medical schemes and retirement funds compulsory. Exceptions would include being a registered dependant on a spouse’s medical scheme.
The following items need to be discussed specifically.
Negotiations: Where trade unions are recognised, any changes to conditions of employment must be negotiated with the trade unions. Sometimes organisations are subject to regulation through bargaining councils, which means that their remuneration practices are prescribed by industry-specific needs. It is unlikely that an application for exemption regarding the total package structure would be successful.
Guaranteed 13th cheque: The 13th cheque is usually guaranteed and paid annually. Where a pro rata bonus is forfeited on resignation, people can plan their departure in such a way that they can still receive the maximum benefit. The incorporation of the 13th cheque in the total package should therefore not result in an extra cost to the organisation. Accrued bonuses are paid out on conversion.
Medical aid membership: Where medical aid contributions are subsidised, those employees who are not members of the medical aid do not benefit from such subsidies. These benefits are usually equalised when converting to total packages.
The member is responsible for the full contributions payable to the medical aid fund. Employers should therefore ensure that the medical aid fund rules reflect the total contribution payable by each member. In a total package structure, an employee may request that the employer pay the full contribution on his or her behalf. The full contribution would then be allocated as the relevant package component.
Employee benefit schemes exist to support employer remuneration structures. The trend in the market is to participate in more than one medical aid scheme. Employees are given the option to become members of the fund of their choice.
Retirement fund contributions: Pensionable earnings (retirement funding income) are defined in terms of the rules of the fund. The trend in the market is to express retirement funding income as a factor of total remuneration package. The market norm is 70 per cent.
The conversion to packages need not impact on the employer contributions, as the current actual employer contributions are deemed equitable and are usually incorporated into total packages.
Once converted, retirement funding income could be an option within a range, for example, between 50 per cent and 100 per cent of total package. As the future contributions would be one of the package components based on the individual’s choice, flexibility would not result in any additional cost to the organisation.
Insured risks (death and disability cover) are often offered separately from retirement benefits. The trend is to negotiate flexible levels of cover with the underwriters and to offer members the option of choosing the level most suitable to them. The costs of the selected benefits are allocated as relevant package component.
Car allowances: Where car allowances are paid, the market distinguishes between employment cost and operational or business expenses. The fixed cost of acquiring a motor vehicle is considered to be part of the total fixed cost of employment. The use of a motor vehicle for business purposes results in a business expense that is reimbursed.
The South African Revenue Service (SARS) no longer accepts the principle of standard allowances based on grade. Travel allowances may be paid only to those individuals who are expected to use their own vehicles for business purposes.
The amount that should be allocated as the travelling allowance in future should be based on the cost and the use of the vehicle. Individuals should be required to justify the values of their travel allowances before the amount is accepted. Remember that employers are also appointed agents of SARS.
The above requirements may result in some individuals who are currently receiving a car allowance being disqualified from any future allowance.
Business travel reimbursements: Most companies reimburse actual business kilometres travelled. The market differentiates between staff with car allowances and those without. The trend is to reimburse staff without car allowances at a higher rate than that payable to staff qualifying for a car allowance. The reasons for differentiation are that:
- Those not receiving car allowances need to be reimbursed for both fixed and variable costs, whereas the total packages of car allowance recipients are deemed to be inclusive of the fixed cost components.
- The rate applicable to car allowance recipients is partly taxed during the year, but qualifies for a business cost deduction at the end of the tax year.
Tool-of-trade vehicles: The market recognises the need for tool-of-trade (pool) vehicles for individuals who are required to travel excessively for business. The tool-of-trade vehicle is treated as an operational or business cost. In this way, employment costs remain equitable, while operating costs are recorded separately. Incidental private use of the vehicle does not necessarily comprise a fringe benefit. Certain requirements are applicable.
Total packages – benefit values
Benefit values are defined independently from retirement funding income. There is a need to calculate payments such as overtime, inconvenience pay and certain statutory contributions using an equitable value lower than the remuneration package. The trend in the market is to define benefit values as a fixed percentage of remuneration packages, which is applicable to all. The norm in the market is 70 per cent. Severance pay, including the value of leave on termination of service for whatever reason, must be based on the total package in line with the Basic Conditions of Employment Act 75 of 1997.
Accumulated leave: Accrued leave should be capped at current values prior to the conversion to packages. Any further accumulation should be limited to the value of the leave at the time of accumulation. The current accrual could be reduced to more acceptable levels by encouraging employees to take long outstanding leave. Alternatively, employees could be encouraged to convert the accumulated leave to cash, depending on the cash flow position of the organisation. Inequities are usually confined to housing benefits and employer contributions to medical aid schemes. If equity were to be improved on conversion, it would result in an increase in the current cost of employment. If these issues are not addressed, it will restrict equity on conversion.
Organisation cars versus motor vehicle allowances: The debate on organisation cars versus motor vehicle allowances continues. Many uninformed individuals express opinions that unfairly promote one or the other. The bottom line is that the benefits derived from either option are linked to the costs and usage of the vehicle. Following tax changes announced by the Minister of Finance, the car allowance seems to be less targeted than the organisation car, making the car allowance more beneficial for most users.
However, both organisation car and car allowance have a right of existence. As a general rule, the organisation car seems to be more beneficial in cases of relatively low business use, irrespective of the value of the vehicle. Where the price of the vehicle exceeds the maximum (it changes each year), the organisation car seems more beneficial, even in cases of higher business use. The organisation car should not be overlooked by deskbound staff and executives.
The trend in the market is to re-introduce “new generation” organisation cars as a package option. To overcome the asset, cost and risk debate, employers enter into agreements with car rental companies, which ensure that the total related costs are allocated as one of the total package components. The principle is that the individual bears the full consequence of his or her choices.
Mark Bussin is the Chairperson of 21st Century Pay Solutions Group, a specialist remuneration consultancy. He has remuneration experience across all industry sectors, and is viewed as a thought leader in the remuneration arena. He serves on and advises numerous boards and Remuneration Committees on Executive Remuneration. Mark holds a Doctorate in Commerce. He has published or presented over 220 articles and papers, and has received awards for his outstanding articles in this field. He has appeared on television and radio, and in the press, giving expert views on remuneration. Mark is a guest lecturer at several universities around the country and supervises Masters’ and Doctoral theses in the Reward area. He is the current President of SARA (South African Reward Association) and a Commissioner for the remuneration of Public Office Bearers in the Presidency.
He is also the author of the Remuneration Handbook for Africa – A practical and informative handbook for managing reward and recognition in Africa. For more information contact Mitchalene Fouche on 011 880 8540 or firstname.lastname@example.org.